Things To Remember While Draft A Valid Employment Contract

1) What is a Contract under Indian Contract Act, 1872:-

‘A contract is an agreement enforceable by law’

The line defines a contract in its fullest sense. It is an agreement enforceable by law. In illustrating the meaning of the term contract I will take help of a few more definitions

1) Sir William Anson defines contract as ‘A legally binding agreement between two or more persons by which rights are acquired by one or more persons to act or forbearance on part of others’

2) Pollack defines contract as ‘every agreement and promise enforceable at law’

From the above statement we can say that any contract has two parts
1) An agreement.
2) Legal obligation between parties.


Agreement may be defined as every promise and every setoff promises forming consideration for each others. Agreement involves all promises those are supported by a valuable consideration. Promise may be defined as ‘When the person to whom proposal is made signifies his assent there to proposal is said to be accepted. Proposal when accepted becomes a promise.’
Thus we can say.


If X told Y ‘will you buy my car’ and Y says ‘Yes’. This shows an offer was made by X and accepted by Y. Thus an agreement was formulated.

When any person signifies his willingness to do or abstain from something, with a view to obtain the assent of the other to such an act or abstinence, he is said to have made an offer. When the person to whom a proposal is made signifies his assent thereto, the proposal is said to be accepted.


An agreement is a very wide term in comparison to a contract. An agreement has to be legally binding on the parties to constitute a contract. A social agreement as such, e.g. If a person invites people on the occasion of his marriage for a feast and if people accept his offer. There is an agreement between the parties but if the people will not come the person cannot sue them for any damage on account of wastage of food.

2) Essentials of a Valid Contract :-
An agreement is a contract if made by the free consent of the parties competent to contract for a lawful consideration with a lawful object and are not expressly declared to be void.

For an agreement to be a contract the following points must be present

1) Proper offer and acceptance.
2) Consensus ad idem
3) Free consent
4) Competent parties
5) Lawful consideration
6) Lawful object
7) Legal enforceability

1) Proper offer and acceptance :- There must be two parties. It may so happen that a person can contract with himself in two different capacities. The best example is the governor of a central bank of a country who professes to give value of bank notes also promises to him, when he uses those notes. The first capacity is that of the Governor than the capacity is that of the Citizen. The offer must be there and a proper acceptance must be there. The point here is there must be a definite offer and there must be an unqualified acceptance of that offer. Both these offer and acceptance must be communicated.

2) Consensus ad idem - The essence of every agreement is the meeting of minds of the parties in full and final settlement. The situation is called Consensus ad idem. The rule is very simple the mind of the parties must meet in full and final agreement in relation to material facts. If this condition is absent there can be no contract. For example, If A tell B ‘will you buy my car’ and if A has 2 cars and   B thought it to be the other car, then even if B has consented to it they are both under mistake and then the contract is void.

3) Free consent- The consent if present must be free. It means though the consent is acquired, it must be free from any kind of Coercion, Undue influence, Misrepresentation or Fraud.

4) Capacity of parties- The parties who are capable of entering into a contract can only be bound by the terms of the contract. The parties who are minor cannot enter into any kind of agreement. The agreement with a minor is void ab initio. Like this a person who is lunatic or any person who is drunk or any person who is not capable to make reasonable and rational judgments in relation to his position in the contract is not capable of entering into a contract.

5) Lawful consideration- Consideration is something valuable which is given in return of the promise. It is the price paid for the promise maid. It must be lawful. An illegal consideration or absence of consideration makes a contract void.

6) Lawful Object- An object is the motive for which a contract is done. If the object is unlawful or immoral the contract becomes void.

7) Legal enforceability- It may happen that a contract will not give legal remedy to the parties. Then such agreements are not contracts. The primary reasons of this the absence of intention of the parties to bind each other legally.

3) Agreement In Restraint of Profession and Employment Contract:-

According to Section 27 of the Indian Contract Act 1872 ,

Agreement in restraint of trade is defined as "every agreement by which anyone is restraint from exercising a lawful profession trade or business of any kind is to that extent void"

It is a general practice to place restrictive terms in the contract of employee’s. This may include restriction to practice any other employment during the contract term. Along with this there may be clauses that indicate that employee is restrained from practicing a business or profession after his services are terminated or discontinued or after the lapse of contract of employment. Let us analyze the legal standing of these points.

As held in Madhav chander v Rajkumar by The Honorable Calcutta High Court
"Every man should have unfettered liberty to exercises power and capacities for his own and the communities benefit". In the above mentioned case plaintiff and dependent where Rival shopkeepers in our locality in Calcutta. The defendant agreed to pay a sum of money to the plaintiff if he would close his business in that locality the plaintiff accordingly did so but the defendant refuse to pay.  

The court held the agreement to be void and laid down that the word “restrained from exercising a lawful profession business or trade” do not mean total restriction and it intended to apply to a partial restriction limited to some particular place. The Court further pointed out that it is drawing its conclusion also from section 28 where the word “absolutely” is used. In section 27 there is no such qualification used. Thus it includes both Total and Partial Restraint.

In Khemchand Manekchand v Dayaldas, it was held that Section 27 abolishes the distinction between Total and Partial restraint of trade. Whether the restraint is General or Partial, Unqualified or Qualified, if the agreement is in nature of a restraint of trade, it is void.

Again in the case of Muhammad versus Ona Mohammed Ibrahim, Agreements like closing the mail for 3 months in the near and selling be for 14 days in a month only in restraint of trade hence void.

Restraint upon employees in is one of the judicial exceptions of the rule under section 27. They can be divided into two categories :-

a) During Employment:-

Negative Covenants are the clauses in the agreement where there are restraints placed on the employee, to practice business or profession other than that of the master’s during employment terms.  
It is a well-established legal principle that trade secrets, the name of the customers, all other things that can be denominated as objective knowledge, may not be given away by a servant. They are his master’s property and there is no rule of public interest that allows there easy transfers to other against master’s will. So they can be restrained.
A servant may therefore be restrained from taking part in any business in direct competition with that of his employer, in the case of Charles worth vs McDonald, “A” Agreed to become assistant for 3 years to “B” who was a physician surgeon practicing at Zanzibar the appointment was subject to a clause against practicing. “A” left the service within a year and begin to practice there on his own account but he was restrained from doing so during the period of 3 years. As he was still under agreement of employment.

Farran chief justice explain the principle that an agreement of this class does not fall within section 27 if it did all contracts of personal service for a fixed period would be covered under the same umbrella and there will be no use of them. An Agreement to serve exclusively for a week or a day or even for an hour necessary prevent the person so agreeing to serve from exercising his calling during that period for anyone else than the person with whom he is so agrees. This principle was applied by Bombay High Court in the case of Deshpande vs Arvind Mills ltd.

B) After Period of Employment:-

An agreement to restrain a servant from competing with the employer after the termination of employment may not be allowed by Court, In Brahmaputra Company Limited versus Scarth an attempt was made to restrain a servant from completing for 5 years after the period of service the court is disallowed it.
Supreme Court again laid down in Suprintendance Company of India vs Krishna Murugan, Restraint beyond the terms of service would be prima facie void and the only ground on which it could be justified is by bringing it within the scope of the exception that is by showing that it is necessary for the protection of employer’s goodwill. The court also pointed out that even if such restraint is valid it will be only apply after expiry of the term in its natural course and not when the employees is wrongful dismissed earlier.

3) Right to Resign:-

As held in Weiler Internation Electronics Private Limited v Punitha Velu, No restrictions can be imposed upon an employee when his terms of employment were not for a specified period and he had left the job. 

 The milestone case in this regards is Star India Private Limited v Laxmiraj Nayak, Employee of Star TV wanted to resign but his resignation was not accepted on the contrary a case was filed against him for a declaration that he had no right to resign or to join a rival firm. The court refused to issue an injunction for enforcing a negative Covenant. The court said that the question whether the employee have gained knowledge of trade secrets or confidential information or the company has imparted any special training  where matter which could be determined in a trial. Until all this sorted out a negative Covenant in matter of personal service could not be enforced. Freedom of contract include freedom of occupation there was nothing to suggest that the employer was likely to suffer a irreparable loss without the injunction mainly because the employer could face some inconvenience for competition would not be ground for enforcing a negative convenient it is not in public interest on the restraining healthy competition.

4) Contract of Employment and Labour Laws:-

As a matter of Public Policy a contract in violation of labour laws are void. Hence the mention of timings that violates the working hours mentioned in Factories Act, Shops and Establishment Act etc, would be held as void. Also any agreement that restrains the power of an employee to get redressed in a proper Tribunal or Quasi Judicial forum will be agreement in restraint of legal proceedings, hence void under section 28 of Indian Contract Act.

5) Bond Amount and Breach of Bond:-

As held in Toshnial Brothers (Pvt.) Ltd. v. E.Eswarprasad & Ors,

“The Madras High Court held that the employer was entitled to recover the stipulated damages, which is a genuine pre-estimate by the parties of the damages incurred. There is no requirement to prove separately any post-breach damages. The employer is required to establish that the employee was the beneficiary of special favour or concession or training at the cost and expense wholly or in part of the employer and there had been a breach of the undertaking by the beneficiary of the same. In such cases, the breach would per se constitute the required legal injury resulting for the employer due to breach of the contract. “

Again in Satyam Computer Services Limited v. Ladella Ravichander, 
"The Andhra Pradesh High Court held that such action by the Defendant did not cause any damage or loss to the company and it would be unreasonable to acquire such amount from the Defendant. An amount of Rs. 100, 000 was fixed by the court as reasonable damages taking into consideration the period of work and the fact that no actual loss was caused to the Company.”

An indemnity bond which permits an employee to leave the employment earlier than the minimum agreed period only at the cost of the forfeiture of his bond money is valid provided both the period of restriction and the bond money are reasonable. Only that part of the bond money can be retained which is necessary to indemnify the employer for his loss. A person who en-cashes an indemnity bond which in the nature of a bank guarantee can retain only that part of the amount of the bond which represents the damage or loss suffered by the bond-holder as a result of the contracting party's breach. Anything more would be undeserved windfall for one party and penalty of the other.

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